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8Aug/090

California’s 2009-2010 Budget

As of July 1, 2009, the California state legislature was late in passing a 2009-2010 fiscal year budget.  This is not the first time the legislature has been late in passing a budget.  As a result of their inability to get a budget passed by June 30, the state’s budget deficit rose from $24 billion to $26.3 billion.  The problem had gotten so bad that the state had to resort to issuing billions of dollars in IOU’s to many state contractors in order to stave off a cash crisis.  Finally, on July 25, almost a month late, the state legislature managed to pass a new budget.  Unfortunately, the budget they passed still fell $1.1 short of being balanced.

A little over a week ago, Governor Arnold Schwarzenegger signed the 27-bill budget-balancing package into law.  Before doing so, Schwarzenegger used the line-item veto to make an additional $489 million in spending cuts.  The Governor had to do so because the budget that the legislature gave to him left the state with a depleted rainy day fund.  Schwarzenegger rightfully felt the need to replenish that fund to ensure the state’s ability to respond to emergencies.  At the end of the day, California has an $85 billion budget for 2009-2010.

In order to balance the budget, about $15.5 billion came by way of cuts.  Education took the biggest hit, with $6 billion cut from K-12 education and $2.8 billion taken from higher education.  MediCal services were cut by $1.3 billion, the corrections department faces an “unallocated” $1.2 billion in cuts, and three major welfare programs (CalWORKs’ Welfare-to-Work program, In-Home Supportive Services, and the Children's Health Insurance Program) face $878 million in cuts.

A total of $3.4 billion dollars was created through one-time raids on local government funding.  A proposal to allow additional oil drilling off the Santa Barbara coast in exchange for $100 million this year (and $1.8 billion in the next decade or so) was defeated in the Assembly.

This is where things start getting tricky with the budget.  Another $1.7 billion was saved by speeding up tax withholdings on individuals and businesses.  And by deferring state employee paychecks by one day (from June 30 to July 1, 2010), the state saved $1.2 billion in the 2009-2010 budget.

There is a problem here.  Significant amounts of money have been created through accounting gimmicks.  The process of smoke and mirrors used by the California state legislature is not sustainable.  Speeding up tax withholdings and deferring paychecks only pushed the problem off into the next fiscal year.  Money taken from local governments will have to be repaid.  Eventually, reality will catch up to us, and we will be facing a problem that will be even more difficult to deal with.

Of course, this is already assuming that the tax revenue projections used in the budget are even remotely close to being accurate.  There is a very real possibility that the rosy estimates used in the budget could overestimate true revenues by $10 billion or more.  This is going to leave us with an almost impossible situation to deal with both next year and in upcoming years.

Realistically, the woeful inadequacy of the budget recently signed into law will become glaringly obvious far sooner than next summer.  I predict that by late fall or early winter, legislators will once again realize how inept they have been at their jobs and will begin taking measures to attempt to stop the bleeding.  For everyone’s sake, let’s hope they are finally able to take real actions that can lead to a stable California going forward.

27Jun/090

California State Budget Crisis

The State of California is in the midst of a budget crisis.  The California Legislature must come up with a solution to the state’s $24 billion deficit.  Unless they come up with a solution by June 30, the state Controller says that he will be forced to issue IOUs instead of checks to pay the state’s bills.

The piecemeal solutions that the Legislature has been devising over the last few years are not working.  Something significant must change going forward.  It is time for the State to come up with viable permanent solutions to its financial situation.  It is time for financial responsibility to finally be displayed by our elected officials in Sacramento.

It has been suggested by some that hikes in gas taxes and taxes on tobacco, as well as car registration fee hikes should be enacted in order to help the state budget.  I believe that this is the wrong course of action.  Instead, I believe the proper course of action is to reduce the size of government spending.  It is time for California to start living within its means.

For the sake of full disclosure, I do not smoke.  I never have smoked, and I do not intend on ever smoking.  I own two cars that I must pay the registration on, and I pay for gas to fuel these vehicles.

The proper way to look at this issue is not to look at it from a “as long as it doesn’t cost me anything” point of view.  Just because I don’t smoke doesn’t mean that I should support a hike on taxes.  Sure, I would benefit from others having to pay higher taxes on tobacco.  That would increase revenue for the state at absolutely no cost to me.  But, logically, I cannot support raising tobacco taxes.  Tobacco is a legal product.  To continue to look at this vice as a source of additional revenue whenever the state wants some more money is not right.  If society is so concerned about the social costs associated with tobacco, then legislation should be passed to outlaw tobacco.  For the record, I am not supporting this idea in any way whatsoever.  But if tobacco is a problem, deal with the problem head on.  Do not continue the current process of simply turning to the “evil” users of tobacco for more money whenever the state needs it.

Along the same lines as tobacco, simply raising gas taxes or car registration fees in order to generate more revenue for the state does not make any sense.  If the state wanted to build more roads or attempt to get induce people to stop driving as much, then a hike on gas taxes or car registration would at least make some sort of sense.  But there is absolutely no connection between gas and cars and the state’s budget shortfall.  The state is taking steps along that slippery slope of nickel and diming its citizens to death whenever it wants more money.

The state needs to start taking a more common sense approached to raising revenue.  There should be at least some sort of correlation between the increase in taxes and fees and what that money is going to be spent on.  Doing otherwise is tantamount to extortion by the state to cover up their inability to control spending.

And while the issue of raising taxes on the wealthy has not been seriously brought up at this time, that notion always exists in the back of the minds of certain lawmakers.  I am not a wealthy person by any stretch of the imagination.  And considering the cost of living in the Bay Area, absolutely nobody in their right mind could even think of suggesting that I am wealthy.  If lawmakers were to decide to raise taxes on the wealthy, for me, it would be similar to a hike in tobacco taxes.  I would get the benefit of more money going to the state without any cost to myself.  But I cannot agree with such a policy.  It just isn’t right.  John F. Kennedy said that we should “ask not what our country can do for you, ask what you can do for your country.”  Instead of trying to get a free ride on the coattails of others, we must all contribute to well-being of our society.  All Californians should be willing to pay their fair share, even if it hurts.

A much better solution to the state’s budget crisis is to look at the State of California as a very large corporation.  The market is not willing to bear an increase in prices.  Continuing the practice of tax and fee hikes will only drive citizens and corporations out of the state, once again reducing revenue for the state.  Instead, the state should find a way to become more efficient.  Eliminate extra and unnecessary costs wherever possible.  Law enforcement and public safety should be exempt from any cuts.  Beyond that, cut, cut, and cut some more.  K-12 education, higher education, and health and human services comprise huge portions of the budget, so there should be significant cuts in those areas.  Beyond that, each portion of the state’s spending should be gone through with a fine-tooth comb to trim the fat.

The private sector has been dealing with a similar financial problem for the last year.  What has the private sector done to cope with the situation?  Eliminate unnecessary workers.  Consolidate positions and become more efficient.  Cut costs, including salaries.

On a personal level, at my current job, the last year has seen severe cuts in my benefits, and there is a looming threat of a cut in my wages.  Sure, it would be nice if this weren’t necessary.  But we are dealing with reality here.  When times are tough, everyone must be willing to make some sacrifices for the greater good.

Eventually, the state will manage to balance its budget. When that occurs, I hope that everyone remembers what we are going through right now.  And when times get better and the State of California finds itself in a budget surplus, the financial discipline that we are learning right now must remain in place.  There is a tendency by lawmakers to want to spend every single dollar available to them.  We cannot afford to run our state like that.  Money should only be spent on what is necessary.  Allow the citizens of the state to hold onto as much of their money as possible and to decide for themselves how they want to spend their money.

   

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